IRD will have the power to wipe interest (UOMI) if those significantly impacted by COVID-19 cannot pay their tax on time.
The provisional tax threshold will also increase from $2500 to $5000.
The changes were announced by Minster of Finance Grant Robertson as part of the Government’s fiscal and economic response package to COVID-19.
A bill legislating the changes will be introduced shortly.
Below is an analysis of what you need to know following the Government’s announcement.
IRD will have discretion to write off UOMI on payments due after 14 February 2020. That date was chosen because it coincides with when they announced their initial COVID-19 tax assistance options, which included re-estimating provisional tax payments or entering an instalment arrangement.
It will apply to all tax payments such as income tax, PAYE and GST and other payments where UOMI is charged (e.g. Working for Families).
Anyone whose business is suffering due to the outbreak of COVID-19 is eligible to apply.
IRD is still developing the application process and criteria, but says that for taxpayers to receive the concession, they will likely need to prove they have:
- Seen their revenue drop by at least 30 percent compared to the same time 12 months earlier; and
- Exhausted all other options to support themselves financially.
It seems they will need to apply for the concession ahead of an upcoming payment.
Under the current proposal, IRD can remit UOMI for a maximum of two years past the enactment date of the bill.
What about late payment penalties?
As this legislation was put together hurriedly, there is some confusion around whether late payment penalties (LPP) will still apply.
We suspect they been accidentally overlooked and IRD will also exercise its discretion under the Tax Administration Act 1994 to wipe LPP.
The department remits these whenever someone enters an instalment arrangement due to hardship.
Given the severity of the current economic situation, we believe it would be unfair if IRD wipes UOMI but continues to charge LPP.
Increased provisional tax threshold
The increase of the provisional tax threshold from $2500 to $5000 will apply from the 2021 tax year onward.
It will be a welcome change. After all, it will reduce the compliance cost for 95,000 taxpayers by removing them from the provisional tax regime.
For taxpayers who would have otherwise been paying provisional tax in the 2021 tax year, IRD anticipates it will provide estimated cashflow benefits of $350 million.
The Tax Working Group recommended an increase to the provisional tax threshold in its final report last year.
Additional tax measures
The Government also announced several other tax changes as part of its COVID-19 package.
- The reintroduction of a two percent diminishing value depreciation deduction for commercial and industrial buildings (including hotels and motels) for the 2021 tax year.
- A temporary increase in the threshold for expensing low-value assets from $500 to $5000 during the 2021 tax year. The threshold will be $1000 from the 2022 tax year.
- Changes to the calculation of the in-work tax credit to remove the hours worked test.
- IRD having greater information sharing powers to facilitate a whole of Government response to COVID-19.
Other major announcements
- Wage subsidies – $5.8 billion for businesses, up to a maximum cash payment of $150,000 over the next 12 weeks and capped at $585 per week per fulltime employee (and $350 for part-time employees). Businesses will need to demonstrate a decline of at least 30 percent in revenue due to COVID-19 for any month between January 2020 and June 2020.
- Paid leave support – $126 million to support workers impacted by COVID-19 or self-isolation and a $100 million work redeployment package.
- Assistance to those receiving benefits – $2.8 billion via a $25 per week increase in core benefits from 1 April 2020 and a doubling of the winter energy payment.
- Additional health funding – $500 million to improve the COVID-19 response.
- Aviation sector support – $600 million.
UOMI rates likely to drop
The recent official cash rate cut by the Reserve Bank of New Zealand means IRD is likely to drop its UOMI rates.
The overpayment rate will go from 0.81 percent to 0 percent.
That’s because due to a legislative amendment that is in the process of being made, it will be now based on the higher of:
- The 90-day bank bill, minus 100 basis points; or
- 0 percent.
Previously, IRD set this rate using only the 90-day bank bill, minus 100 basis points.
The 90-day bank bill as at 17 March 2020 was 0.66 percent.
Given that, without the legislative amendment, taxpayers will have faced the situation of IRD charging interest on their overpaid tax.
The rate of underpayment (currently 8.35 percent) is determined by taking the floating first mortgage new customer rate and adding 250 basis points. As such, we feel it may drop to around seven percent.
Any change in UOMI rates will likely happen after 7 May 2020. TMNZ will keep you updated.